MAGGIE PAGANO: So, what are the chances we heading for another crisis?

If there is another financial crash, the Queen can’t ask the economists why nobody saw it coming.

The warnings are coming thick and fast: only a few weeks ago Lord King, the former governor of the Bank of England, warned in his book The End Of Alchemy that the world was heading for another financial crash far worse than the last one unless we reformed the banks.

And now the Bank of England is acting swiftly to tighten up credit lending, and toughen up banks’ capital buffers.

First off was the Bank’s Prudential Regulation Authority, the banking watchdog, which has ordered lenders to make it much tougher for landlords to borrow when applying for buy-to-let mortgages.

Warning: Last week former Bank of England Governor Mervyn King said that the world was heading for another financial crash

Proving that it’s more rottweiller than poodle after all, the PRA has told lenders to take action to curtail lending and potential credit losses by checking if borrowers can afford repayments in the event of higher interest rates, such as a 2 per cent rise in rates. (While good in intent, it’s going to be interesting to see whether lenders have the time or the will to go into such detail.)

There were the usual suspects criticising the PRA’s move, claiming the regulators are too late to lance the bubble. But the PRA is obviously worried that the buy-to-let market is still boiling – which I suspect it is. Making it as tough as possible to take out new mortgages, along with the Chancellor’s higher stamp duty, must be the right thing to do.

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Over the last quarter of last year the number of buy-to-let mortgages grew by 11.5 per cent, and stock has risen by around 40 epr cent since the crisis, compared with around 2 per cent for the owner-occupied market. What’s worse, there’s still a chronic housing shortage which can only be solved by building more homes.

The Bank’s Financial Policy Committee was also on form: it has ordered some of the country’s smaller banks to put an estimated £1billion more aside to act as counter-cyclical buffers to ward off any potential threats to financial stability.

The FPC doesn’t say which banks but there are serious concerns in the sector that many of the smaller challenger banks are not strong enough to compete with the big High Street banks. You could say most of the UK’s banks are under pressure. Since November last year, share prices across the banking sector are down by 15 per cent reflecting much weaker profits, particularly from investment banking.

So it’s good to see that Andrew Bailey’s PRA will be putting them through some pretty tough scenarios for when it holds the 2016 bank stress test later in the summer.

This is the PRA’s Doomsday scenario, one which simulates a global recession of a similar magnitude to the Great Recession following the 2008 financial crisis, with oil dropping to $20 and unemployment jumping to 10 per cent.

Risks: Wobbles over Brexit, and fears of a falling pound, have deteriorated the UK’s outlook for financial stability

What’s interesting about the Bank’s latest moves is whether Bailey and his colleagues are overreacting now because the previous regulators at the FCA were so slow at spotting the signs of the crash. Are we seeing a Cry Wolf-type scenario? Or are we in the headwinds of what some commentators are calling the ‘perfect storm’?

No wonder the Bank’s FPC said the UK’s outlook for financial stability had deteriorated since the end of last year, and that risks stemming from ‘domestic credit have risen beyond their subdued levels’ during the immediate post-crisis period.

Translated, that means they have risen too much. Add in the wobbles over Brexit, and fears of a falling pound, then those perceived risks shoot up even more.

So what are the chances we heading for another crisis? By and large the UK and US banks are fairly decently capitalised. It’s the European banks which are far more vulnerable, as many of them are too frightened to own up to losses as this would reveal how short of capital they are.

When I spoke to Lord King recently about his excellent book – and his radical proposals for reform, which should be read by all policymakers – he hadn’t changed his mind one jot about the risks brewing in the financial system. He has some good remedies too.

All banks should be encouraged to have a much higher degree of equity capital – maybe as much as 20 per cent – and they should all take out ‘catastrophic insurance’ because ‘you can’t ever price risk against the great unknowns’. As King also warns: ‘If you want peace, prepare for war.’

Page-turners

There's always a silver lining if you look hard enough, even to the financial crash: sales of business books, self-help and start-up advice books are booming.

At Penguin, the booksellers have been intrigued by the big appetite from general readers for business biographies. Now Foyle’s says business books and start-up books have also given sales a big boost, helping the bookshop return to the black this year.

But even bigger sellers are the cheeky Ladybird books for adults, giving advice on the likes of hangovers and the midlife crisis. More popular still are the adult colouring books which are said to be so good for calming the mind and soothing the soul. No doubt they are being bought by ex-bankers.